SEI Investments Co (SEIC) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SEI third quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. And instructions will be given instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded today, Wednesday, October 19th, 2011. I would now like to turn the conference over to Mr. Al West, Chairman and CEO. I would now like to turn the conference over to Mr. Al West, Chairman and CEO. Please go ahead, sir.

Thank you, and welcome everybody. All of our segment leaders are on the call as well as Dennis McGonigle, SEI's CFO and Kathy Heilig, SEI's Controller. I'm going to start by recapping third quarter 2011. I'll then turn it over to each one of the business segment leaders to comment on the results of their segments. Dennis will then cover a couple items, including LSV. Finally, Kathy Heilig will provide you with some important Company-wide statistics. As usual, we will field questions at the end of each report.

Let me start with the third quarter 2011. Third quarter earnings were 13% lower than earnings a year ago on a revenue increase of 6%. Diluted earnings per share for the third quarter of $0.27 compares to $0.30 reported for the third quarter 2010, a drop of 10%. Our earnings for the quarter were affected by a loss attributable to the SIVs on our balance sheet, which netted to a decrease to earnings of approximately $800,000. This compares to an $8.7 million increase to earnings due to SIVs in the third quarter 2010. This swing represents approximately a $0.03 per share.

Also during the third quarter 2011, our non-cash asset balances under management experienced significant losses. SEI's assets under management fell by $19.5 billion during the quarter, including $11.5 billion drop in LSVs assets under management. As you will hear later, this drop in assets under management is market-driven. In addition during the third quarter, we repurchased just under 3.7 million shares of stock at an average price of just over $17 per share. That translates to over $63 million of stock repurchases during the quarter.

New recurring revenue sales are still slow. While the investment managers and institutional investor segments had good sales quarters, both segments are experiencing delays in conversion. In addition, the advisor segment added a number of new advisors to its roll but did suffer from the loss of assets under management due to market volatility. Banking had a decent sales quarter, and they have a number of prospects in the latter stage of the sales process and are working hard to close them in the fourth quarter. Each of the segment heads will address their sales events.

We're continuing our investment in GWP and its operational infrastructure so critical to our future. During the first quarter, we capitalized approximately $10 million of the Global Wealth Platform development and amortized approximately $6.6 million of previously capitalized development. Now, while we're increasingly encouraged with our long-term opportunities with the roll-out of GWP, we are working hard to improve the profitability of our bank segment. Coming out of the second quarter, we initiated cost reduction and control program managed mostly on banking -- focused mostly on banking. We believe this will pay dividends in 2012.

We just recently passed an important GWP milestone. We successfully converted 85 of our smaller advisor clients to GWP, making them the first US users of GWP. This is very important for us because we're getting to exercise basic US functionality as well as test many of our processes in a low volume operation. This will be helpful when larger, more complex advisors are added next year. Now, to accommodate the launch into the US as I mentioned in the past, we are concentrating on building the functionality and infrastructure necessary to process US banks and advisors. The next three releases contain a large number of US enhancements, and these releases will complete the baseline functionality for the US, also significantly enhance the UK's functionality and improve our operational efficiencies and scale.

I continue to be encouraged by the feedback I receive from clients and prospects in all of our markets. Although we have growing pains in certain areas, our investments in infrastructure and new service offerings have enhanced our competitive strength across all of our business lines. We certainly expect to capitalize on this even in these challenging times. And our solution strength coupled with our financial strength position us well for the long-term growth. This concludes my remarks. I'm going to turn it over to Joe Ujobai to discuss our Private Banking segment.

Thank you, Al. Today we'd like to give you an update on our activity and the current financials for the Private Banking segment. Revenue for the quarter was essentially flat to the previous quarter at $88 million. Revenue was negatively impacted by market depreciation. Expenses declined slightly as we are implementing the tightened spending controls mentioned by Al. As I said last quarter, I'm not satisfied with the results in the Banking segment, and I'm focusing more acutely on revenue growth and profitability. Expenses were generally down in all categories versus last quarter, with the exception of some brokerage related transaction expense and sales commission. We continue to work our expense management program, which will drive more impact in the coming quarters. Ultimately, our profit picture will improve by growing revenue and implementing new clients and converting assets to GWP.

Turning to new business. Net investment processing sales events for the quarter were $8.3 million, of which approximately half of this is recurring revenue. In the UK, we signed three new GWS deals. In July I mentioned our 11th GWP client, Amber Financial Investments. Amber is a business transition client, meaning we'll open the firm for business later this year, convert assets to GWP over time. Today, I'm announcing two additional clients. Both are in the infrastructure business model and will convert the majority of their assets at once. The first is Absolute Return Investment Advisors or ARIA. ARIA is a fast-growing boutique wealth manager. The second is Northern Bank, a wholly owned subsidiary of Danish Bank Danske and a large retail bank in Northern Ireland. During the quarter we also converted two previously announced clients, Premier Asset Management and Fusion Wealth.

The trend in our asset transition activity remains positive and is improving. GWP asset transition programs resulted in net new cash flow of approximately $650 million. The pipeline continues to grow as we replace closed deals with new opportunities and expand to new segments such as the private client investment manager market. We now have 13 signed GWP clients in the UK. Seven are business transition and six are infrastructure clients. Of the 13 clients, 8 firms are national IWAs, three firms are private client investment managers, and two are banks. All of our clients have strong plans to grow their businesses using GWS as a centralized operating model.

Turning to the US, during the quarter we closed two additional community bank clients, continuing our success in this segment. Our US investment processing pipeline is as large as it's been in recent years and includes community, regional, and national banks. Our prospects are encouraged by the eventual path to GWP. As we execute against our US GWS launch strategy, we have increased our marketing efforts larger nonbank wealth managers. During the quarter we recontracted nine clients and are on track for good overall recontract year.

As review of our asset management distribution business, net cash flows into SEI management programs slowed considerably due to the capital market conditions. Ending asset balances dropped to $15.4 billion, largely due to market depreciation. In conclusion, I'm strongly encouraged by our efforts to number one, manage expenses, number two, close new sales events and convert clients, and finally, grow our pipeline. We're building a strong foundation which will ultimately lead to significant growth and improved profitability in this segment. Any questions?

(Operator Instructions). We have a question coming from the line of Glenn Greene with Oppenheimer. Please go ahead, sir.

Thanks. Hey, Joe.

Hi, Glenn.

Maybe you could give us a little bit of color on the two new GWS wins that you just announced, order of magnitude, asset size, or potential?

Okay. We don't specifically report individual asset types by firm or asset size by firm. Both firms are what we would call infrastructure clients, meaning that we would convert all their assets at once post a conversion project. They would -- I would say that both firms get us a little bit further into this private client space, private client investment manager space although Northern is a bank, and they would be sort of on the small to medium size for us as far as additional assets.

Okay. And then maybe you could just update us on sort of the -- how you're sort of thinking about the size of the pipeline maybe relative to some of the comments you made back in June at the investor event. Where does the pipeline stand at this point?

I think as we said for a long time, this is a momentum business, and the more success we have, the more we will have. So the pipeline -- we obviously closed a few things in the pipeline since then, the three deals that I mentioned today. Pipeline is actually growing. It's trending again more towards traditional conversion clients, and we're starting to see larger firms into the pipeline.

And then just finally, the cost efforts that Al alluded to, maybe you could help us size that and give us some sense for the savings potential in 2012.

Yes, we're still in the middle of that, so it's hard for me to give you a number, but we're really looking at everything. So we certainly are looking at how we scale up GWP operations, how we continue to invest, what we continue to invest in as we build out the platform beyond the core processing capabilities into the discretionary capabilities. And certainly looking at the US and Trust 3000 business to find additional efficiencies. So our goal really is to manage expenses, to not drive a lot of expense increase, and to get as efficient as possible as we start to bring on more revenue, but we're really in the middle of that project now.

Okay. Thanks, Joe.

Thank you. Our next question comes from the line of Jeff Hopson with Stifel Nicolaus. Please go ahead.

Okay. Thanks. Joe, in regard to the pipeline, I know you've brought a few out, but in terms of the seasoning, I guess of the pipeline, are there ones moving through the pipeline such that there's still a few at the later ends, I guess, and so what are the prospects over the next six months to continue to bring things out?

I think we're making good progress on the pipeline and things are coming through. We're getting better at the sales process. We're getting better at the contracting process. So I think we will -- a quarter's a short period of time, so I wouldn't say we definitely have an absolute trend that every quarter we're going to announce a few more, but I feel good about the pipeline, and I think we're making good progress at bringing the prospects through. So I'm positive about it.

Okay. And those prospects in the pipeline, are they showing any hesitancy because of the market environment? And then in the US, anything new on timing of conversion of the first clients and the readiness of the pipeline or the product?

So to your first question, of course people are busy, given the market conditions, but I don't see that impacting -- I don't see that significantly impacting decisions with the current pipeline. If anything, I think firms realize they need to move to a more variable pricing model than a fixed pricing model, which our solution offers. So people are obviously quite busy, and certainly the uncertainty doesn't give people a lot of comfort, and they're distracted by that but in general we're plugging along pretty solidly with the prospects. On the US side, an important step for us in the US was -- has been getting the initial advisors up and Wayne will talk a little bit about that in a few minutes. That's important for us because we're now starting to implement some of this US functionality, and we're looking to bring community bank -- a community bank or so up toward the end of next year, and that hasn't really changed at this point.

Okay. Thank you.

Operator. Thank you. Our next question comes from the line of Chris Donat with Sandler O'Neill. Please go ahead.

Hi, good afternoon, everyone. Joe, you just said that Wayne's going to talk about the 85 clients. I won't ask that one. Just my one question for you is can you remind us what the -- sort of the payment process is for your salespeople as you bring on new clients, what they -- how they earn the money and over what time period that is as you bring on new clients?

Sure. We like to pay the salesperson when the deal gets closed and/or installed and then have them move on to the next opportunity. And so we pay an investment processing salesperson a percentage of either the first year revenue or we pay them a percentage of the average contracted revenue. So if it's a business transition client, we pay them a percentage of -- or an average of the five year or whatever the length of the contracted revenue, an average of it and again, if it's a transition client we pay them percentage of the assets that convert, and we book the expense now when we announce the sale.

Okay. Thank you.

Thank you. Our next question comes from the line of Robert Lee with KBW. Please go ahead.

Thanks. Good afternoon, Joe.

Hi, Rob.

Quick question on the nine clients in recontract, can you just update us on a little bit of the pricing experienced in recontracting. I guess I'm still working on the assumption maybe it's everything being equal, a little bit of a give-up on recontracting in some way, shape or form. And then I have a follow-up question.

Okay. So we've talked a couple times over the past year or so that despite the fact that this a fair amount of pressure in the market around fees with some of the other Trust systems that are out there, we have managed to lower our -- to improve our recontracting rates, from sort of the 15% net down to single-digit net down. That continued this quarter. So there is some net down. We usually have been able to mother that net down amount by providing additional services to the clients. So that hasn't changed. So it continues to be sort of a single digit and -- but t there is a fair amount of pressure out there in the marketplace.

Okay. Great. And just want to make sure how to think of the new sales activity. I mean, you mentioned that net sales equals about an $8.3 million revenue run rate, maybe 50% of that is recurring. Is that -- are you including the three new wins in the quarter in the community banks, that kind of all bundled within that?

Yes. It would be the three GWP wins plus the two community bank wins.

Okay. That was it. Thank you.

Operator. Thank you. Our next question comes from the line of Tom McCrohan with Janney Montgomery and Scott. Please go ahead.

Hi, everyone. Hi, Joe. Can you compare and contrast the sales process of GWP here in the US relative to the UK and the success you had there, in terms of how maybe the product is being positioned, the value proposition, the firms that you're targeting here in the US relative to the UK, and maybe any other differences you think are worth talking about? Maybe how the product is being priced here in the US relative to the UK? Thanks.

Okay. So we're beginning to talk a lot more actively in the US. I think we learned in the UK that our solution isn't just for banks, that there are a lot of -- a variety of different wealth managers in the marketplace that would benefit by our solution, not just bank or bank trust departments. In the UK, you saw us expand to large independent advisory firms and private client managers that we've talked about and the success we've had. So as we approach the US market, we are approaching a much broader set of opportunities, not only banks and bank trust departments that may have competitively installed Trust accounting systems, but also the advisory groups with inside of banks and other wealth management activities that banks may have. And we've certainly gone beyond banks as we started initially in the US to call on large advisors that may be looking for an investment processing only decision rather than a bundled decision. Or even we are even talking to some mid-size broker dealers and other wealth managers as they move their business from sort of a commission based business to more of a fee based business. So as I've said several times, we think there's a lot of interesting opportunity out there. We have kept with our business model around asset based fees as being the primary driver of revenue, which provides a more variable pricing model for the marketplace, which again I think in uncertain and turbulent times, there seems to be appreciation for that there. I'd say we're seeing a lot of opportunity in the US. We're still l in early days because we haven't installed a large firm in the US yet. We've obviously made great progress with small advisors here in the US, but I'd say it's an interesting opportunity, and we're continuing to add more sales resource to call in the US marketplace.

Is it -- I know it's still in the early innings. Is it possible, Joe, to break down your GWP pipeline between US, non-US and how you expect that breakdown to kind of track over time?

It's probably too soon to do that. I think we need some -- a few more quarters in the US to be able to make some of those calculations. But clearly, the US is a bigger market. It's probably 10 times bigger than the UK market, so I would expect over time as we deliver this to have -- and we're in the market selling this, to have a very, very robust pipeline in the US. There is more competition in the US than there is in the UK. But I would expect the US to be a pretty significant opportunity for us.

Thanks, Joe.

Thank you. And there are no further questions in the queue. Please go ahead.

Our next segment is investment advisors. Wayne Withrow will cover this segment. Wayne?

Thanks, Al. During the third quarter, we continued to see positive net cash flows. However, we experienced a slowdown in growth during December as uncertainties crept into the financial markets around the world. Assets under management were $28.8 billion at September 30th, an 8.7% decline from June 30th. This entire decline was due to the global decrease in market values. While we did receive over $100 million in net positive cash flow for the quarter, we experienced slightly negative flows in September. Gross cash receipts for the quarter were just under $1.2 billion. Revenues for the quarter were 48 -- $46.8 million, an almost $3 million decline from the second quarter. Almost all of this decrease was due to declining market values. After driving increase in margins for the past four quarters, we saw a decline in margins during the third quarter as we were unable to reduce expenses in an amount corresponding with the rapid decline in market valuations.

On the new business front, we signed 141 new advisors during the quarter, up from the 127 we signed in the second quarter. Our pipeline of new advisors remains strong, and approximately 10% of our total assets under management are from advisors we have signed during the past 3.5 years. The number of new advisors signed is good news, but the better news may be while markets were choppy and investors cautions during quarter, we did not see redemption rates like we saw in 2008 and 2009. In addition, we remain on track with our long-term strategic initiatives, the most significant of which is the US roll-out of the Global Wealth Platform. We converted 85 beta clients onto the platform near the end of if third quarter and are now gaining experience in rolling out the new platform and operating it in the US. These beta clients are very small SEI mutual fund only clients. As we move on to larger, more complex advisors, market acceptance has been strong, and five of our largest advisors have signed letters of intent to be an early adopter of the platform at the end of the second quarter of 2012. Shortly after the first set of five large advisors, we will slowly ramp up the roll-out in the last half of 2012, with a more aggressive roll-out beginning in 2013. In summary, the recent market declines put pressure on our third quarter revenue and profits, but the segment remains well positioned for growth. I welcome any questions you may have.

(Operator Instructions). Our first question comes from Jeff Hopson with Stifel Nicolaus. Please go ahead.

Hey, there, Wayne. I'm sorry if I missed this. I was distracted for a minute. But the expenses that drifted up, what would be responsible for that? And then two, as you go and try to attract newer advisors, how is the new platform kind of playing into those discussions?

Okay. The first question on expenses, it's not as if our expenses went up significantly. They were -- maybe 1%. They were pretty consistent with the prior quarter. Just that we were unable to cut them at a pace consistent with the rapid market declines. What was your other question there, Jeff?

In terms of the attracting new -- recruiting new advisors, whether the new platform is part of what you're discussing with them about?

At this point, we're talking to them about the new platforms generally, but we really haven't -- we're selling our existing value proposition to advisors. So our existing value proposition is still strong. I would expect the Global Wealth Platform would just accelerate that process, and we will be introducing that, we hope to introduce that into the new advisor conversations probably the beginning of -- the end of this year.

Okay. And back on the expenses, so from here, is the current rate, the run rate, or is there any ability to moderate that downward, I guess?

I think it's sort of my job to deliver the bottom line applicable to what we have to do to maintain profitability in the segment.

Operator. Our next question comes from the line of Glenn Greene with Oppenheimer. Please go ahead.

Hey, Wayne, just one quick question. Sorry, Wayne, one quick question. Just the -- is there an incremental or a change in pricing for these advisors as they're given the ability to leverage the GWP platform, or is it just sort of part and parcel of the service you're providing?

I think the answer to the question is we will -- right now, we're primarily focused on mutual fund assets, and with GWP, we're going to broaden this out beyond the open-end mutual fund assets to include more asset types. To the extent -- so for SEI funds, the pricing does not change.

Okay.

To the extent they consolidate outside assets onto the platform, which is our goal, there will be incremental pricing charged to them.

Okay. Okay. All right. Got it. Thanks.

That's basis points.

Got it. Is it similar pricing to your core assets, or it's sort of -- I'm just trying to get a sense to the basis point fees on average assets go up, or is it just the incremental assets that you're trying to get because of the capabilities of GWP?

I think it's more like a processing based point fee and not -- which is generally less than an asset management based point fee. It's similar to what we earn in banking.

All right. Thanks.

Thank you. Our next question comes from the line of Chris Donat with Sandler O'Neill. Please go ahead.

Another one on GWP here. Is this the sort of thing that we will soon see on your -- the asset balances page that's attached to the Earnings Release, a line for client assets under management for the investment advisors? Is that something that we'll see next quarter or two, or is it really like a year or so away?

I think -- I get in trouble when I start talking about what the accounting rules are, so I'll defer, but I would say from a business perspective, I don't see how we would be doing anything like that in the near term. It's probably a 2013 item.

Okay. So really for 2012, GWP for advisors is targeting current customers, current clients, and maybe 2013's really when the new ones might start coming on and people who would bring more assets under administration for you?

I think that's right. I think during 2012 we're targeting existing clients, although we will try to have them consolidate more assets on the platform, which may be some small incremental revenue but not significant. It's 2013 when you should expect to see larger, newer clients come on with all types of assets.

Got it. Okay. Thank you.

Thank you. There is no further questions in the queue. Please continue with your presentation.

Thank you, Wayne. Our next segment is the Institutional Investor segment and I'll turn it over to Ed Loughlin to discuss this segment. Ed.

Thanks, Al. Good afternoon, everyone. As I've done for the last several quarters, I'm going to focus the majority of my remarks on the financial results and also the progress we've made during the third quarter compared to the second quarter of 2011. Third quarter revenues of $52 million declined by 5% compared to the second quarter, primarily due to market depreciation. Operating profits approaching $27 million represented a $600,000 decline compared to the second quarter. Quarterly margins of 51% increased by 120 basis points during the period. Margins will continue to be sensitive to small changes in revenue and expenses.

Quarter end asset balances of $50 billion reflect a $4.5 billion decrease compared to the second quarter of 2011. And net new client funding during the third quarter was $419 million. The backlog of committed but unfunded sales was $504 million at the end of the quarter. And client signings for the third quarter were $754 million, and they total $3.1 billion year-to-date through September.

New client sales continue to be an important element for growth in the institutional segment. Sales activity and new client wins continue to improve, but market activity is still subdued. We enjoy a healthy pipeline of globally diversified prospects, and we remain optimistic that as economic conditions improve, prospective clients will again return to a more normal decision making time line and sales results should increase again.

SEI has served as a fiduciary manager for the last 15 years, responsible for actively managing client assets and liabilities, and we're well positioned to capitalize on the growing outsourcing trends in this segment. This concludes my prepared remarks and I'm happy to entertain any questions you may have.

(Operator Instructions). We have a question coming from the line of Tom McCrohan with Janney Montgomery Scott. Please go ahead.

Hi, Ed. Is there anything on the horizon related to pension accounting changes that could be a catalyst for additional outsourcing plans to SEI?

There's no accounting or regulatory change, no, Tom.

Okay. That's all I had.

Thanks.

Our next question comes from the line of Chris Donat with Sandler O'Neill.

Quickly, revenues were down 5% but you still managed to increase your margin. Was there anything interesting on the expense side that you were able to control or just had had a good quarter?

Well, the expenses were down somewhat. One of the things that we do have is we have direct costs, and so part of that would be the fees that we pay the money managers, so as our asset balances decline, that declines, and that is again for our offshore funds.

Okay.

So that's something that is managed, but it's managed kind of mechanically. I'd much rather that be going up.

Right. But nevertheless, you were able to expand the margin in a contracting --

Yes. It's very sensitive. It's very sensitive to small changes of margin.

Thank you. There are no further lines in queue, so please go ahead with your presentation.

Thanks, Ed. Our final segment today is Investment Managers. I'm going to turn it of to Steve Meyer to discuss this segment.

Thanks, Al. Good afternoon, everyone. I will briefly cover the financial results of the segment for the third quarter of 2011 including our new sales and market environment. For the third quarter of 2011, revenues for the segments totaled $45.6 million which was $1.1 million or 2.5% higher than the second quarter of 2011. Also on a year-over-year basis, this represents an increase of $5 million or a 12.4% increase over our revenues for the third quarter of 2010. Our quarterly profit for the segment of $16.2 million was approximately $1 million or 6.6% higher than our profit for the second quarter of 2011. It was also $1.3 million or 9.4% higher than our profit for the third quarter of 2010. The quarter-over-quarter increase in profit was largely due to an increase in our revenue for the quarter. The majority of this was one-time revenues associated with conversion fees.

Third party asset balances at the end of the third quarter of 2011 were $233.7 billion, approximately $14.2 billion or 5.7% lower as compared to our asset balances at the end of the second quarter of 2011. Decrease in assets was primarily due to net negative cash flows of $7.6 billion, which was primarily outflows in some of our clients' lower fee traditional products such as stable value funds as well as some redemption activity and some alternative products. This was coupled with market depreciation of $6.6 billion. The market depreciation reflects the volatile markets we experienced in the third quarter of 2011, and only reflect a portion of that volatility since much of the impact came late in the quarter. During the third quarter of 2011, we had net new business sales events totaling $4.1 million in annualized revenue. Although these sales events were less than previous quarters, they do reflect the prolonged decision cycles that this uncertain market is producing.

From a market perspective, unfortunately not much has improved from the previous quarter. Again, we have all experienced the volatile and challenging markets which seem to breed uncertainty and decision delays. However, despite the market as a headwind, we continue to see a strong activity in our segments and continue to grow our pipeline. As I said before, I believe this market volatility and its related impact is the new normal. And I believe our job is to continue to battle through and execute on the opportunity that comes along with this new market norm. While this market produces challenges, I am still of the mindset that we have continued opportunity to grow out business for the long term, and I feel we are well positioned from a business, a solutions, and an execution standpoint. Thank you for your time, and I'll now turn it over for any questions you have.

Thank you. (Operator Instructions). We have a question coming from the line of Robert Lee with KBW. Please go ahead, sir.

Thank you. Good afternoon, Steve.

Hi.

Could you maybe just give us a quick update of -- I think you mentioned, you've talked about before, just kind of on the pricing environment as you go in and look at new clients or look at recontracting.

Sure. I'd say, as we've talked before, that the pricing environment definitely -- there's more pressure on the pricing side these days. Competitors of ours are either going to grow in this environment. You either grow by capability or by reducing prices. So I think overall, prices are under pressure. I still think we're able to battle them with premium services and offering more services, but I do think that's something that will continue, especially in this new market environment, and something that we'll have to deal with going forward.

And maybe just one quick follow-up. You guys clearly have never been acquisition oriented for good reason, and yet you look at what's going on in Europe, and I believe there's probably reasonable number of European institutions that you compete against who may be in the position that they have to shed some assets. How would you think, or do you think about any incremental opportunities to use capital in that way to help grow and expand your business outside the US?

Well, I'd say as you pointed out it's never been our preferred method, and we would certainly not do it just for the sake of growth. But what I would say is as the market changes and we look to expand our business into new markets, that is something that we wouldn't blindly say no to. It's something that we would consider. Again, it would have to be the right opportunity, obviously our Company has somewhat of a different culture, and we think a very good culture. And the last thing we want to do is spend our time focused internally, but I think for the right opportunity to expand our business or get into a new market, that's something that we would consider.

Great. Thanks for taking my questions.

Sure.

Thank you. (Operator Instructions). There are no further questions. I'll turn it back to management.

Thank you, Steve. I'll now ask Dennis to discuss LSV and the Investments and New Business segment.

Thanks, Al. Good afternoon, everyone. I will cover the third quarter results for the Investments and New Business segment and make a few brief comments on LSV Asset Management. During the third quarter, the Investments and New Business segment continued its focus on direct marketing and research activities towards the ultra high net worth investor and the further buildout of services. During the quarter, the Investments and New Business segment incurred a loss of $1.5 million which compares to a $2 million loss during the second quarter of 2011. There has been no significant change in this segment, and we expect losses in this segment to continue in this range for the remainder of the year.

Regarding LSV, we continue to own approximately 41% of LSV in the third quarter. LSV contributed approximately $23.9 million in income to SEI during the quarter. This compares to approximately $29.5 million in the second quarter of 2011. The decrease is due primarily to decreased revenues at LSV from lower asset balances. Asset balances shrank approximately $11.5 billion during the quarter, primarily from market depreciation. LSV generated net positive cash flow during the quarter of approximately $500 million from both existing and new clients.

During the quarter, we generated losses totaling $800,000 from our SIV security that we hold on our balance sheet. This loss was primarily a result of a decrease in mark-to-market value with the collateral underlying the structure, which was offset by cash distributions we received during the quarter. As of today our SIV holding carries a mark-to-market value of approximately $55 million.

Finally, during the quarter, we made a $20 million payment on our outstanding debt. Our current outstanding debt is $20 million that is reflected in current liabilities on the balance sheet. This is down from an original debt level of $254 million about two years ago. I will now take any questions you might have.

(Operator Instructions). We have a question coming from the line of Glenn Greene with Oppenheimer. Please go ahead, sir.

Thank you. Hi, Dennis, how are you?

All right, Glenn, how are you.

Good. A few questions. Do you have the LSV revenue in the quarter?

I do. Give me one second. It's about $67 million.

$67 million. Okay. And then the tax rate to assume going forward? Looks like it was a little bit lower this quarter.

Kathy's sitting next to me, so I'll give Kathy all the credit. Her team has been working hard on tax planning strategies. As we talked about in the second quarter, we had some benefit the second quarter, some additional benefit this quarter, and we'll have some benefit going forward, although the tax rate will probably go up a little bit going forward.

Should we use, I don't know, 35% or so?

Yes, I'd say 35% is a good number.

All right.

Hopefully we'll get some benefits on things we're working on that will improve that a little bit.

The final question, which is more of a reconciliation question. In your press release you highlight for the Company, I think it was $7.9 million of new net sales events and --

Right.

As I heard Joe and Steve talk, I heard Steve suggest $4 million for his business and almost $8 million for Joe's business? I'm missing something there.

So did we. I'm glad you brought that up. In that sales number, we inadvertently included in the netting of it the revenue loss from market depreciation on bank asset management.

Okay.

Which is about $4 million, little over $4 million. So you would gross those numbers up by $4 million.

Normally you don't do that, right? Normally you don't -- so it should have been closer to $12 million is what you're saying.

Correct. And then the recurring would be grossed up by that same $4 million. And that gets you closer to what you were trying to reconcile.

Terrific. Okay. Thanks.

Thanks.

Thank you. Our next question comes from the line of Chris Donat with Sandler O'Neill. Please go ahead, sir.

Just why does the debt appear as a current liability as opposed to long-term now?

Well, first, welcome aboard, Chris.

Thank you, Dennis.

Appreciate you joining the party here. Because our facility actually has a term that's next July.

Oh, okay.

It was a five year deal, and it will expire in less than a year, so we have to move that debt up to current liabilities.

Got it. I was wondering if that was telegraphing intent. Seems like it's been the case to pay that down anyway. Small point. Thanks.

Although that certainly would be our intent given our pattern here.

Yes. Okay. Thank you.

Thank you. Our next question comes from the line of Jeff Hopson with Stifel Nicolaus. Please go ahead.

Hey, Dennis. The reduction in assets at LSV seemed a little large, and the non-US indices were down more. Do you know what the mix of assets is in terms of their investments between US and non-US?

It's still predominantly US, large cap, small cap. They do have products that have decent amounts of assets in them, but their absolute returns were really down pretty significantly. It's just -- remind us the S&P was down 14% and small cap was more than that.

Outside the US was almost 20.

The (inaudible) assets would be down even more than that.

Right. That's what I was looking at. The non-US being down 20%. Okay. But they did have net cash flows.

Yes, of just over $500 million. That came from,as I mentioned, new clients as well as existing clients. They also, they've had this for a while, they do get rebalancing impact. Sometimes that works in our favor, sometimes it doesn't.

Okay. Very good. Thank you.

You're welcome.

Thank you. And there are no further questions in the queue. I'll turn it back to management.

Thanks, Dennis. I'd now like to turn it over to Kathy Heilig to give you a few Company-wide statistics.

Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter. Third quarter cash flow from operations was $82.7 million or $0.45 per share. Year-to-date cash flow from operations, $175.5 million, or $0.94 per share. The free cash flow for the third quarter was $48.8 million, and that does reflect a debt repayment of $20 million. The year-to-date free cash flow is $58.9 million, and that reflects debt repayments of $75 million. The third quarter capital expenditures were $2 million, and that excludes capitalized software. Capital expenditures for the remainder of this year would be about the same next quarter, about $2 million.

Now, we already talked about the tax rate, which was 33.8% and both this quarter and last quarter did reflect some tax planning. That's why the rates are lower. We would expect some of that also reflected in next quarter, as Dennis already said, with the rate approximately 35%. But when we go into next year, we would expect the rate to be 36% because the tax planning we did this year has an element of one-time in it, as well as permanent reductions. I also would caution that that 36% rate seems assumes that the R&D tax credit, which is another deduction that we get, is extended. That is set to expire at the end of the year, but it always seems to get extended. The accounts payable balance at September 30 was $6.9 million.

We would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to your periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results. Now, please feel free to ask any other questions that you may have.

(Operator Instructions). Our first question comes from the line of Chris Donat with Sandler O'Neill.

I think I'll set this one up for Al or maybe for Dennis. Probably more of a Board question. Looking at the cash of over $400 million on the balance sheet, and trying to think of how much you really need to run the business, and then the stock below 15 today after you paid $17 a share to repurchase in the third quarter, anyway, do you think differently about the mix of dividends and share repurchases given where the stock is priced right now and given how much cash you have?

Well, I'll give you my thoughts and then Al can probably correct it. I think our -- generally, the Board's view is certainly we have an active, ongoing stock repurchase program, and I think third quarter you saw us get a little more aggressive on that and that it's safe to say that given where the stock price is and given our certain strong beliefs in the future growth of the Company that that would continue. And the question about dividends, I'll just leave that up to the Board to address, which they will in December. But I think you've seen historically SEI, fairly consistently, the dividend has gone up, and I believe even last June, the last time we had a dividend declaration, it went up, I don't know, 18% or so.

Okay.

I agree with everything Dennis said. The Board actually had a discussion yesterday, and like Dennis said, the dividend decision won't be made until December, but we are very active in our stock repurchase, and we'll continue to be that way. And if we get the opportunity with stock available, we will go as heavy as we can.

Okay. Thanks. That helps.

Thank you. There are no further questions in the queue. I'll turn it back to management.

Thank you, Kathy. So ladies and gentlemen, although short-term growth has been very difficult to come by, I remain bullish about our long-term business opportunity and the positive impact we will make on the markets we serve. We've always prided our self as being innovators in our market, and that is no more true than today, and our focus is unwavering on that. With that, concludes the discussion we've had today. If there's any questions that might have come to you as a sort of a doorknob, you have a chance to ask them now.

Just one moment, please.

If there's no questions, then I wish everybody a very good afternoon, and thanks for joining us.

I'm sorry, there are no questions, sir, at this time.

Okay. I'll say it again. Thank you very much for joining us, and I appreciate your time. Have a great afternoon.

Operator. Ladies and gentlemen, this conference will be available for replay after 4 PM eastern today, through October 19th, 2012 at midnight. To access the AT&T executive replay system at any time, by dialing 1-800-475-6701, or 320-365-3844, with the access code of 220311. Ladies and gentlemen, this does conclude our conference call for today. Thank you for your participation, and you may now disconnect.